U.S. insurers saw a second consecutive year of declining income from private equity investments in 2023, with earnings dropping to $7.7 bn, compared to $10.2 bn in 2022, according to AM Best.
Despite the income drop, U.S. insurers’ private equity holdings increased by 10.8% to $146.2 bn, up from $132 bn in 2022. This rise followed previous growth of 3.3% in 2022 and 37% in 2021.
The 2023 growth came largely from $7.4 bn in new or additional investments and an increase of $6.8 bn in the book value of current holdings. Life-annuity (L/A) insurers drove most of this growth, accounting for over 75% of the industry’s private equity investments.
In 2022, demand for private equity investments had slowed due to rising interest rates and recession concerns. However, in 2023, investments rebounded as insurers looked for higher yields through alternative investments.
According to the report, private equity investments remain concentrated among a small number of large insurers. Fifteen companies, primarily L/A carriers, hold just over 60% of private equity assets, with allocations averaging 5% of their total invested assets.
David Lopes, a senior analyst at AM Best, noted that evaluating the ratio of these holdings to capital offers better insight into potential exposure.
The ratio of these holdings to capital can be a better guide for determining potential exposure
David Lopes, senior industry analyst, AM Best
Among the top 15 private equity investors, the average exposure to capital and surplus (C&S) stands at 40.2%. However, over half of AM Best’s rated companies have exposures below 10% of their C&S.
Lopes emphasized the importance of thorough due diligence when choosing private equity firms for investment. He added that most insurers have sophisticated in-house investment management teams and prefer experienced money managers with strong track records.
While private equity provides insurers with diversification and higher yields compared to other asset classes, the relatively small percentage allocations reflect more conservative strategies and lower risk tolerance.
Insurers remain cautious about the effects of private equity on capital models, as common equity investments like limited partnerships face higher capital charges than rated debt or preferred equity.
by David Lopes, senior industry analyst, AM Best